BP Singapore Pte Ltd v Jurong Aromatics Corp Pte Ltd (receivers and managers appointed) and others and another appeal

• Judge: Sundaresh Menon CJ
• Judgment Date: 26 February 2020
• Neutral Citation: [2020] SGCA 9
• Citation: [2020] SGCA 9
• Defendant Counsel: Lee Eng Beng SC, Disa Sim and Torsten Cheong (Rajah & Tann Singapore LLP) (instructed),and Tham Hsu Hsien, Peh Aik Hin, Lee May Ling and Alisa Toh Qian Wen (Allen & Gledhill LLP)
• Published date: 29 February 2020
• Hearing Date: 23 September 2019
• Plaintiff Counsel: Davinder Singh SC, Jaikanth Shankar, Tan Ruo Yu, Darren Low Jun Jie, Yee Guang Yi and Terence De Silva (Davinder Singh Chambers LLC)
• Docket Number: Civil Appeal Nos 28 and 29 of 2019
• Court: Court of Appeal (Singapore)
• Date: 26 February 2020
• Subject Matter: Debt and Recovery,Right of set-off,Credit and Security,Bankruptcy,Equitable,Charges

Judith Prakash JA (delivering the judgment of the court):

The right of set-off provides a convenient mechanism for the settlement of claims and cross-claims. For it to apply, the debts must be due between the same parties, in the same right: Rory Derham, Derham on the Law of Set-Off (Oxford University Press, 4th Ed, 2010) (“Derham on the Law of Set-Off”) at para 11.01. As straightforward as this principle may seem, it is not always easy to apply especially where the cross claims are between corporate entities, one of whom has charged its receivables to a financier, and the chargor company is subsequently placed in receivership but continues thereafter to do business with the other entity. These appeals arise in this context. The company in question and its trading partners had mutual claims and cross-claims. A secured creditor of the company appointed a receiver to take charge of the company’s business, crystallising the floating charge over the company’s present and future book debts. The company entered into new trading arrangements with the trade partners, albeit under the direction of the receiver. The question that arose was whether the trading partners could set-off their post-receivership indebtedness to the company against the company’s pre-existing indebtedness to them.

Background facts

The first respondent in both appeals, Jurong Aromatics Corp Pte Ltd (“JAC”), is a Singapore company that was incorporated for the purposes of constructing, developing and operating a condensate splitter integrated with an aromatics plant on Jurong Island (“the Plant”). The Plant was designed to process condensate feedstock and other raw materials in order to produce aromatics and petroleum products.

In April 2011, a syndicate of financiers (“the Senior Lenders”) provided loans to JAC totalling approximately US$1.68bn. By way of a debenture dated 30 April 2011 (“the Debenture”) entered into between JAC and BNP Paribas, Singapore Branch (“the Agent”) for and on behalf of the Senior Lenders, the Senior Lenders obtained from JAC a comprehensive security package over all of JAC’s undertaking and assets to secure their loans. In particular, by cl 3.1(c) of the Debenture, JAC granted in favour of the Agent a first fixed charge over all its assets listed in that clause, including all its present and future book debts. By cl 4.1, JAC granted in favour of the Agent a first floating charge over its undertaking and all its present and future assets, including all assets charged under cl 3.1.

The appellant in Civil Appeal No 28 of 2019, BP Singapore Pte Ltd (“BP”), and the appellant in Civil Appeal No 29 of 2019, Glencore Singapore Pte Ltd (“Glencore”), were both suppliers and customers of JAC. In March 2011, they each entered into feedstock supply and product offtake agreements with JAC (the “BP-JAC feedstock supply agreement”, “BP-JAC product offtake agreement”, “Glencore-JAC feedstock supply agreement” and “Glencore-JAC product offtake agreement”, collectively “the Trade Agreements”). Under each feedstock supply agreement, JAC agreed to purchase feedstock from the particular supplier for processing into aromatics and petroleum products. Under each product offtake agreement, JAC agreed to sell the products back to the relevant supplier of the feedstock.

the Set-Off Agreement

The Glencore-JAC feedstock supply agreement and Glencore-JAC product offtake agreement themselves expressly provide, by cl 10(a) and cl 2.6(f) respectively, that parties are not entitled to exercise a right of set-off in respect of any sums due under those agreements. Parties subsequently varied these terms by way of a set-off agreement dated 23 December 2014 (“the Set-Off Agreement”), under which Glencore and JAC agreed to set-off mutual claims arising out of the Glencore-JAC feedstock supply agreement and Glencore-JAC product offtake agreement. It is common ground that the net effect of the Set-Off Agreement is the creation of a debt (“the Set-Off Agreement Debt”) payable by Glencore to JAC. No such debt is owed by BP.

receivers and managers appointed

JAC ran into financial difficulties sometime in 2014. The operations of the Plant were shut down in December 2014. Eventually, on 28 September 2015, Mr Cosimo Borelli and Mr Jason Kardachi, respectively the second and third respondents in these appeals, were appointed receivers and managers of JAC pursuant to the terms of the Debenture. We will refer to them as “the Receivers” hereafter. The appellants were given notice of this appointment on 29 September 2015.

Later that year, both BP and Glencore issued enforcement notices stating their intention, amongst other things, to apply for the winding-up of JAC. As at November 2015, Glencore quantified the amount which JAC owed it as being US$162,293,222.38 and BP quantified the amount which JAC owed it as being US$106,433,075.32. There was, subsequently, dispute about some of the amounts claimed by Glencore but it was common ground in these proceedings that nevertheless, prior to the appointment of the Receivers, JAC was substantially indebted to both appellants as a result of the Trade Agreements. We refer to this indebtedness as “the JAC indebtedness”.

the Tolling Agreement and the sale of the Plant

The plan to wind up JAC was postponed because the Receivers put forward a plan for the continued functioning of the Plant while a purchaser for the Plant was sought. Negotiations in this regard between the appellants and the Receivers resulted in an agreement dated 19 April 2016 (“the Tolling Agreement”) under which the appellants would be able to use the Plant for production of their products until its sale. As a condition precedent to entering into the Tolling Agreement, the appellants required that the Senior Lenders provide an irrevocable undertaking in respect of two matters: (a) not to remove the Receivers from their position as JAC’s receivers until the tolling and transitional period thereafter was completed; and (b) not to take any step that would have the effect of frustrating, preventing or interfering with the performance of the Receivers’ and/or JAC’s obligations under the Tolling Agreement. Various letters of undertaking to this effect were accordingly issued by the Senior Lenders prior to the commencement of the tolling process under the Tolling Agreement.

Essentially, tolling was a process in which the appellants utilised the Plant to process the feedstock they supplied into aromatics and petroleum products which they could sell. In exchange, JAC was to be paid a monthly tolling fee by the appellants for the use of the Plant. Between August 2016 and August 2017, the appellants duly paid the monthly tolling fees under the Tolling Agreement. They did not, however, pay the tolling fee for the month of August 2017 amounting to some US$5.46m due from each of Glencore and BP (“the Tolling Fee Debt”).

Instead, on 28 August 2017, Glencore, with the support of BP, instituted winding-up proceedings against JAC. This action was followed on 20 September 2017 by a letter from the appellants to JAC in which they asserted, for the first time, that the Tolling Fee Debt was subject to insolvency set-off against the JAC indebtedness. JAC was ordered to be wound up on 18 February 2019.

In the meantime, in May 2017, a purchaser for the Plant, ExxonMobil Asia Pacific Pte Ltd (“ExxonMobil”), had been found. BP, Glencore, JAC and ExxonMobil entered into a transitional agreement dated 16 June 2017 (“the Transitional Agreement”). BP, Glencore and JAC entered into a supplemental agreement in respect of the Transitional Agreement dated 16 June 2017 as well (“the Transitional Supplemental Agreement”). These agreements facilitated the “hot transition” of the Plant. A “hot transition”’, as opposed to a “cold” one, would allow the Plant to be transferred to ExxonMobil while operations were ongoing rather than JAC having to shut down the Plant before effecting its transfer. The sale of the Plant in this way would fetch a substantially higher price than if it were sold to ExxonMobil in a “cold transition”.

The appellants had agreed to undertake various obligations to facilitate the hot transition. One of these was their agreement pursuant to cl 2.1 of the Transitional Supplemental Agreement to pay JAC a sum of money known as the Final Payment Amount. The Final Payment Amount represented the value of certain feedstock (“the Initial Inventory”), that JAC had transferred to the appellants at the start of the tolling process and which the appellants were obliged to return to JAC at the end of tolling pursuant to cl 5.3 of the Tolling Agreement. For present purposes, it suffices to note that the Initial Inventory consisted of that residual base of feedstock that, for physical reasons, could not be extracted from the Plant’s processing machinery. The Final Payment Amount, a sum of US$16,205,334.86, was not paid when due and, as with the Tolling Fee Debt, the appellants asserted on 20 September 2017 that the Final Payment Amount was subject to insolvency set-off against the JAC indebtedness.

As part of the entire tolling arrangement, the Receivers also agreed with Glencore and BP that they would receive a monetary incentive (“the Performance Incentive”) if certain key performance indicators relating to the output capability of the Plant were achieved in the course of tolling. The appellants were eventually paid some US$110m on 28 August 2017 under this arrangement. This was also the date on which the sale of the Plant to ExxonMobil was completed.

The proceedings and decision below

The decision below arose out of the Receivers’ applications by originating summons for declarations that the appellants were not entitled to set-off the Tolling Fee Debt and the Final Payment Amount against any debts owed by JAC. In relation to Glencore, the Receivers sought an additional declaration that it was not entitled to set-off the Set-Off...